With stock markets soaring, two factors can serve as early warnings of where and when a financial-market bubble might burst, and whether it will be followed by a market correction or a broader economic crisis. It all comes down to the intrinsic productive value of the underlying assets, and how investments are financed.
LONDON – The signs of bubbles emerging in financial markets are clear to see. The Dow Jones index recently surpassed 40,000 for the first time, and the UK FTSE 100 and French CAC 40 also have reached new highs. Forward price-to-earnings ratios in the United States are trading at a multiple of around 25 – well above the historical average of 16 – and these high valuations have persisted despite interest rates above 5%.
LONDON – The signs of bubbles emerging in financial markets are clear to see. The Dow Jones index recently surpassed 40,000 for the first time, and the UK FTSE 100 and French CAC 40 also have reached new highs. Forward price-to-earnings ratios in the United States are trading at a multiple of around 25 – well above the historical average of 16 – and these high valuations have persisted despite interest rates above 5%.